CWS Market Review – March 16, 2012

After a long, dull stretch, this was a pretty eventful week for Wall Street. The S&P 500 cracked 1,400 and several of our Buy List stocks are breaking out. Two of our stocks, CA Technologies ($CA) and JPMorgan Chase ($JPM), are already up over 34% for us on the year. The resurgence of risk-taking has given a major lift to our portfolio.

Last week, I said that Friday’s jobs report would be a major driver for the market, and indeed it was. Although, the jobs report for February wasn’t quite as strong as I was expecting, it was still pretty good and Wall Street took notice.

Here’s the bottom line: The U.S. economy has proven its ability to create more than 200,000 jobs per month, which is a nice change of pace from shedding millions of jobs per year. Plus, the good jobs news looks to continue. Thursday’s jobless claims report was the best one in four years.

Slowly, the economy is gaining strength. To be sure, we’re still a long way from full stride, but the key for us as investors is that companies are seeing more bodies come through their doors. In fact, Bed Bath & Beyond ($BBBY), a major retail player, gapped up to a new 52-week high on Thursday. Longtime readers will recall that this was our top-performing stock from last year. It’s already up 13.1% for us this year. Look for another good earnings report on April 4th.

The Fed’s Optimism Lifts Our Buy List

The other big news from this past week was Tuesday’s Federal Reserve meeting. I was pleased to see that the Fed’s post-meeting policy statement reflected a more optimistic outlook for the economy. The central bank said that “the economy has been expanding moderately” and that “strains in global financial markets have eased.” This is especially encouraging because central bankers almost always see the dark clouds in any silver lining.

The question now is: Will Benny and his Buds be encouraged to raise interest rates before their 2014 forecast? My view is that we simply can’t tell right now. It’s best for us to assume that rates are going to stay low for a good while longer. Outside of certain commodities, most companies don’t have enough market power to raise prices.

Fortunately, continued low interest rates is good news for many stocks on our Buy List like Nicholas Financial ($NICK). Speaking of which, that stock gapped up to $14.41 on Tuesday. It’s hard to believe that three years ago NICK was going for less than $2 per share. I think we may see a dividend increase here as well.

Throughout the financial markets, what we’re seeing is a continuation of the trend I’ve been highlighting: investors are gradually taking on more risk. This is a very good sign for us. It’s more accurate to say that investors are finally letting go of their super-conservative investments in favor of moderately risky investments.

Consider that after an historic three-year bull run, the S&P 500 isn’t outrageously priced. That’s odd to say, but it’s true. Even at 1,400, the index is trading at less than 14 times this year’s earnings estimate. I think it’s very possible that dividends for the S&P 500 could rise by 15% this year.

Another sign that investors are becoming more tolerant of risk is that the long end of the Treasury yield curve is still rising. It’s not good for stocks when so many investors are glad to accept 2% for lending Uncle Sam their capital for 10 years. Perhaps that makes sense when it seems like world is about to end. But now things are changing. The yield on the 30-year T-bond recently ticked above 3.4%. Six months ago, it was yielding less than 2.8%. The key for us is that as investors take on more risk, our Buy List will continue to do well.

JPMorgan Backs Up My Dividend Call

In last week’s CWS Market Review, I said that JPMorgan Chase could “easily afford” to raise its dividend by five cents per share. Sure enough, that’s exactly what happened. The bank raised its quarterly dividend from 25 cents to 30 cents per share. That news actually helped spark a financials-led rally on Tuesday afternoon. (Some folks thought it was Jamie Dimon’s way of stealing the spotlight from the Fed.) JPMorgan continues to be one of the strongest major banks on Wall Street. Going by Thursday’s closing price, the new dividend gives JPM a yield of 2.68%.

As I mentioned, JPM’s dividend news lifted the entire market on Tuesday. Our financial stocks AFLAC ($AFL), Hudson City ($HCBK) and Nicholas Financial ($NICK) all saw big gains. The market continued to rally on Thursday and the S&P 500 broke 1,400 for the first time since 2008. Our Buy List continues to break out to new highs, and it’s even extending its lead against the S&P 500. Through Thursday, our Buy List is up 13.20% for the year compared with 11.53% for the S&P 500.

I should remind you that Oracle’s ($ORCL) earnings report is coming next Tuesday, March 20th. I’m not yet confident that we will see a major earnings surprise here. Still, Oracle is a strong company and it’s very well-positioned. I also like the fact that Oracle has very strong cash flow. I feel that the company embarrassed itself last earnings season and they’re looking to right themselves in Wall Street’s eyes.

The numbers here are pretty clear: The stock is going for less than 12 times next year’s earnings (their fiscal year ends in May). On top of that, I think we’ll see Oracle raise its dividend from six cents to seven cents per share. If you’re able to get Oracle for less than $30 per share, you’ve gotten a good deal.

Reynolds American ($RAI) made news this past week when the tobacco company said that it’s planning on cutting 10% of its U.S. workforce. Fortunately, this will be achieved by attrition instead of laying people off. I’m glad to see that Reynolds is staying alert on ways to keep costs down.

Before I go, I should mention that some of our quieter Buy List stocks have been doing very well. Wright Express ($WXS) just closed at a 52-week high on Thursday. Fiserv ($FISV) continues to plow ahead. Both stocks are up 18% for us this year. Hudson City ($HCBK) is up by 10% just in the last three days—and it still yields more than 4.3%. Ford ($F) just topped $13 per share for the first time in over a month.

That’s all for now. We’re heading near the close of the first quarter so earnings season isn’t far way. I expect to see another round of stellar results from our stocks. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on March 16th, 2012 at 5:55 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.